Is W T K Holdings Berhad (KLSE:WTK) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies W T K Holdings Berhad (KLSE:WTK) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for W T K Holdings Berhad

How Much Debt Does W T K Holdings Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 W T K Holdings Berhad had RM265.4m of debt, an increase on RM218.3m, over one year. However, its balance sheet shows it holds RM380.2m in cash, so it actually has RM114.8m net cash.

How Healthy Is W T K Holdings Berhad's Balance Sheet?

The latest balance sheet data shows that W T K Holdings Berhad had liabilities of RM194.8m due within a year, and liabilities of RM169.3m falling due after that. On the other hand, it had cash of RM380.2m and RM45.7m worth of receivables due within a year. So it actually has RM61.9m more liquid assets than total liabilities.

This surplus suggests that W T K Holdings Berhad is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, W T K Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since W T K Holdings Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year W T K Holdings Berhad had a loss before interest and tax, and actually shrunk its revenue by 21%, to RM361m. That makes us nervous, to say the least.

So How Risky Is W T K Holdings Berhad?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months W T K Holdings Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM25m and booked a RM139m accounting loss. With only RM114.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that W T K Holdings Berhad is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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